Last updated: 8/5/2022
If you believe that taxation is theft, you're certainly not alone.
Nevertheless, if you live in the United States and you're transacting with cryptocurrency, you'll have to report your crypto transactions to the IRS. For business owners or CFOs transacting in crypto on behalf of a business, it is especially critical to get this right—or risk the entire business. But we're not here to scare you—we're here to help you to become more knowledgable about crypto tax accounting.
Gilded provides essential tools for businesses transacting in cryptocurrency (A/R, A/P, automated crypto invoices, crypto payroll tools, Et al.). When it comes to crypto taxes, we consolidate your various crypto wallets and automate spot pricing for each transaction. Basically, we make it so that your accountant won't hate you. Most accountants are new to crypto tax accounting, so it's important to help and make their lives easier too.
Over the last few years, we've fielded a lot of questions from businesses about crypto tax accounting. So we decided to compile and answer your most frequently asked cryptocurrency tax questions in this quick simple guide:
What’s considered a taxable event in crypto? How much will you need to pay? How do you calculate your taxes? What about DeFi, NFTs, and yield farming?
How to Report Cryptocurrency on Taxes
Do you have to pay taxes on cryptocurrency?
Yes. In most countries, including the United States, cryptocurrency is taxed as property and subject to capital gains tax.
What does it mean for crypto to be taxed as property?
If you bought a crypto asset and sold it for a profit, you will be liable for the capital gains on that asset—similar to real estate. The amount you are taxed depends on how much capital gains/losses you incurred, how long you held the crypto asset, and your exact geographic location. For each taxable event, you will need to keep track of the date, spot price, cost basis, and any associated fees.
What crypto actions are considered taxable events?
- Trading crypto for crypto (e.g. ETH for BTC)
- Selling crypto for fiat (e.g. ETH for USD or EUR)
- Paying for goods or services with cryptocurrency (however, paying with stablecoins like $USDC results in De Minimis tax consequences)
- Receiving cryptocurrency as a result of a fork or from mining (e.g. mining BTC)
What crypto actions are NOT taxable events?
- Transferring crypto between your personal crypto wallets (e.g. sending ETH from your Coinbase wallet to your MetaMask wallet)
- Buying crypto with fiat (nontaxable until you pay for a good or service, sell, or trade the cryptocurrency)
- Gifting cryptocurrency (but if the gift is over $15,000 per year then you may be subject to a gift tax).
How do I calculate my cryptocurrency taxes?
The capital gains tax is based on two things: cost basis and the fair market value of your trade. To calculate your taxes, subtract the fair market value from the cost basis to find your capital gains.
Here's an example...
Let’s say you invested $1,000 into Ethereum at $500 per coin (meaning you bought 2 coins). There is also a 1.5% fee.
In this example, your cost basis, or the cost at which you bought your cryptocurrency, is ($1,000 x 1.015) / 2, or $507.50 per coin.
A few months later, you decide to sell 1 Ethereum at $750 per coin. Since your cost basis was $507.50, your capital gains is $242.50. You will only be taxed on the gains.
What if you sell at a loss? Let’s say you sold 1 Ethereum at $250. Your capital loss would be $257.50. In some cases, you might be able to offset your capital gains by reporting your losses.
That’s why you need to report all of your trades, regardless of whether it was a loss or gain.
If you’re unsure of how to track your transactions, you can schedule a demo with an expert at Gilded to see easy it is to import your wallets and transactions to one easy-to-understand dashboard.
How much in taxes are you going to pay for your crypto transactions?
The amount you pay in tax depends on the capital gains/losses, how long you held the asset, and where you were located at the time of the taxable event. With so many variables, it would be impossible to address everyone’s situation for the scope of this guide. We'll discuss a couple different accounting treatments and how it would be taxed based on one specific example.
FIFO vs. LIFO
To calculate your crypto tax burden, you will simply need to match the cost basis to the fair market value from the sale. However, it gets tricky when you have multiple cost bases for the same asset.
Let’s say you bought 1 bitcoin at $10,000 and another bitcoin at $20,000, and then sold 1 bitcoin for $30,000: which cost basis would you use?
That’s when the various accounting methods like FIFO or LIFO come into play. If you used FIFO (or first in, first out), then you would use the first purchase for the cost basis and your capital gains would be $20,000.
On the other hand, if you used LIFO (or last in, first out), then the cost basis would be based on the last purchase ($20,000) and your capital gains would be $10,000.
Keep in mind, while you don't have to report which cost basis method you're using, once you choose a method, you must stick to it. There's no mix and match with the IRS.
Long Term vs. Short Term Capital Gains
If you sold your bitcoin less than 12 months after you bought it, then you are subject to short term capital gains tax rates, and it’s taxed as ordinary income. Conversely, if you sell after the 12-month period, then you will have the benefit of lower long term capital gains tax rates.
Short term capital gains are taxed at a higher percentage than long term. The reason? The government wants to incentivize long-term investments over short-term trades. Your taxes will also vary based on how much income you bring in, if you’re married, or if you have any dependents.
Without getting into the weeds on different income brackets and tax percentages, we recommend talking to a crypto tax professional or using a crypto tax software (more on this below).
How do I account for more nuanced crypto taxes like DeFi and NFTs?
Decentralized finance (DeFi) and non-fungible tokens (NFTs) have taken the crypto industry by storm. With all the growth in this space, there are so many questions about how to account for them in your taxes. However, accounting for these types of trades are simpler than they might seem.
At the most basic level, anything that generates income will result in taxable income (the same is true for your DeFi and NFT income). For example, if you generate income from yield farming in DeFi or selling NFT digital art for a profit, then this will be taxed as income. To learn more about DeFi taxes, we recommend checking out this DeFi Crypto Tax Guide from CryptoTrader.Tax.
If you want to learn more about accounting treatment for NFTs, our NFT accounting guide clarifies some things for this emerging asset class.
What crypto tax services help automate this process for me?
When it comes to filing your taxes, you have a few different options. You can do your taxes on your own, hire an experienced accounting professional to do them for you, or use a crypto tax service.
At Gilded, we consolidate your wallets and give accurate spot price data for every transaction, which is more than half the battle in nailing your tax reports.
However, if you’re looking for a crypto tax service, here are a few companies worth checking out:
We hope this guide was helpful! There's a lot of fear and uncertainty surrounding crypto taxes, but if you get your accounting right, it's not so difficult.
Accounting starts with the payment. If you'd like see how Gilded can automate your crypto workflow from payments to accounting, schedule a Gilded Group Demo.
------
Disclaimer: This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to a tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.
Founded in 2018, Gilded is backed by Techstars and the Association of International Certified Public Accountants (AICPA). Gilded helps global companies scale by automating cryptocurrency payments and accounting. In 2020, Gilded announced partnerships with TrustToken, Paxos and Stablecorp to offer the world’s first B2B payment solution powered by stablecoins.
